Wednesday, July 21, 2010

Congress, Federal Reserve chairman Ben Bernanke, Treasury Secretary Timothy Geithner and the rest of the folks who run the economy are patting themselves on the back for passing the financial "reform" legislation.

Obama says it was "my policies that got us out of this mess."

The new bill is widely described as the biggest change in how the economy is regulated since the Great Depression.

Is it true?

Unfortunately, as discussed below, none of our real economics problems have been addressed.

Consumer confidence is plunging again, and yet little in the legislation really restores trust in the system.

The poker game started breaking down because the wealthiest took all of the chips, and most people have no money to play with ... but the bill does nothing to address the ever-widening gap in wealth.

The bill does little to restore the rule of law, which - as PhD economist James Galbraith notes - is a necessary ingredient in economic recovery.

Unemployment continues to plague the economy, because - even with the new bill- the government is feeding the parasite and killing the patient.

Main street continues to bleed because - instead of breaking up the too big to fails so that their dead weight stops suffocating the real economy (virtually all leading independent economists have said that the too big to fails must be broken up, or the economy won't be able to recover, and see this) - the government has allowed them to get even bigger (and see this and this).

Indeed, just as BIS warned years ago, bailing out the banks has simply spread their problems into sovereign crises ... and now the banks and governments are broke, and the global strategy of printing obscene quantities of money ("quantitative easing") is debasing currencies worldwide.

"Deficit hawks" like top economic historian Niall Ferguson says that America's debt will drive it into a debt crisis, and that any more quantitative easing will lead our creditors to pull the plug. See this, this and this. Indeed, PhD economist Michael Hudson says (starting around 4:00 into video):

"If the problem that is grinding the economy to a halt is oo much debt, and if no one in the government - in either party - is looking at solving the debt problem, then ... we're going to go into a depression as far as the eye can see.Yet the U.S. hasn't reined in its profligate spending. While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter."...

Shady accounting is part of what got us into this mess ... but as Citigroup Inc. analyst Keith Horowitz notes, banks are making huge amounts of money from an accounting rule that allows banks to book profits when the value of their own bonds falls.

High frequency trading is wrecking the markets ... but isn't addressed in the new legislation.

Neither is reforming money pits like Fannie and Freddie The Fed is now warning that it could be 5 to 6 years before the economy recovers, and that there is a "significant downside risks" and a possible slide into deflation. That's not a big surprise ... Ben Bernanke doesn't understand that liquidity was never the problem, and he has continued the same behavior which got us into this mess in the first place. Bernanke and the Fed have caused widespread destruction to the economy (see this, this, this and this). And yet the financial reform bill gives the Fed has more - instead of less - power...MORE...LINK